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  3. 7b) portfolio b consists of 15 stocks, 10 of which

7b) Portfolio B consists of 15 stocks, 10 of which have beta 1 and idiosyncratic...

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Finance

  1. 7b) Portfolio B consists of 15 stocks, 10 of which have beta 1 and idiosyncratic variance 0.02, and 5 of which have beta 1 and idiosyncratic variance 0.04. What is the minimum idiosyncratic variance one can achieve by investing in these stocks? You should assume that the idiosyncratic risks of the stocks included in B are independent across stocks. (Hint: the portfolio that minimises the idiosyncratic variance has equal weights in stocks with the same idiosyncratic variance.) (9 marks)

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